Was wondering what drawdown limits at places like Millennium actually refer to in practice - saw some post saying if you have a 3% drawdown your capital is halved and either 5% drawdown you get fired - does anyone know what drawdown refers to and whether positive PnL offsets or adjusts the threshold? Like hypothetically if you are up 10% one week and down 5% the next do you just get automatically fired despite the fact you have made positive PnL?
Also I get that most of these places will be market neutral, but how do risk limits around factor exposure work? To the extent that a lot of pods end up long companies with positive earnings momentum and short companies with negative earnings momentum their books would be long some kind of momentum factor, but not sure how this works in practice
each firm is different, but they give you some number which represents your "capital" and your drawdown limits are based on a %of that capital.
Millennium default is 5% you get cut in half 10% you are fired
So, the standard PM as Millennium starts with $100mm of "capital" (this is typically pre-leverage money)...and so if 5% is your "cut in half" marker, then that mesn if you go down 5mm, they cut your capial in half..and if you go down 10mm you are fired.
Schoenfeld is 1-2% tighter
Exodus has various pods with different metrics....Rates RV i've been told you can go down 7-8% before they cut you in half, 10-12% you are fired
Citadel is like Schoenfeld for the default, but there are exceptions (takes a number of years of good performance to be an exception)
platforms with multiple pods with similar exposure will have a central risk book that sometimes hedges firm concentration risk in specific names / factors (this is a decision by the risk manager that the pod may never know about)
and, as always "it depends" because some PMs will have different contracts with different #s
also, the "market neutral" aspect of a firm / pod is not completely accurate...plenty of PMs are day-trading in a VERY not factor neutral way, and going back to neutral by the end of the day to comply with their risk mgmt mandate
Are these risk limits over a specific time horizon? Or if at any given point you are down 5% you’re slashed in half and 10% and you’re fired?
Bumping this because I am also curious about how they calculate drawdowns. On the second Q, I believe most legit shop will not allow you to simply lean on factors like this. You can take some idio views on sub-sectors which may reflect through factors but bulk of the book need to be factor neutral.
Very useful information above but the question still remains:
Is the 5% drawdown:
Also, I hear drawdown limits of 2.5% spoken about for the liked of Millennium and Citadel so is the above 5% drawdown number above correct ? Thanks a lot.
great question... following for the answer
The 5% limit is a soft stop based on the high water mark. Capital tends to get halved and for MLP there is a 7.5% hard stop where you’d get cut completely.
BlueCrest is the tightest I know of, around 3% and desk costs are a lot higher due to the family office structure which makes it tough. Having said this, PMs can still be cut after being flat or even slightly up. I know a multi-strat this week let go of several and they weren’t even down YTD.
Everyone knows the % drawdown limits but people don't understand that different funds use different denominators, which leads to a lot of confusion.
What MLP calls a 5% limit, most funds would express as 2.5%.
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